Supreme Court Mandates Section 90 Notifications for MFN Clause Benefits in India's DTAAs

Introduction

The landmark judgment titled Assessing Officer Circle (International Taxation) 2(2)(2) New Delhi vs. M/S Nestle SA (2023 INSC 928) decided by the Supreme Court of India on October 19, 2023, addresses pivotal issues concerning India's Double Tax Avoidance Agreements (DTAAs) with select OECD member countries. The central matters revolve around the interpretation of the Most Favored Nation (MFN) clauses within these treaties, the necessity of OECD membership of third countries at the time of treaty execution, and the imperative of issuing notifications under Section 90 of the Income Tax Act, 1961, for the enforcement of treaty benefits.

Summary of the Judgment

The Supreme Court overturned the decisions of the Delhi High Court, which had allowed companies like Concentrix Services Netherlands BV and Optum Global Solutions International BV to claim reduced withholding tax rates under the MFN clauses of their respective DTAAs with India. The High Court had interpreted that the protocols accompanying these DTAAs were integral parts of the treaties themselves, negating the need for separate notifications under Section 90. However, the Supreme Court clarified that under India's dualist legal system, treaties do not automatically become enforceable domestic law upon ratification. Instead, explicit notifications under Section 90 are mandatory to incorporate treaty provisions, including MFN clauses, into India's domestic legal framework.

Analysis

Precedents Cited

The judgment extensively referenced both Supreme Court and High Court precedents that underscore the necessity of legislative action for treaty enforcement in India:

Steria India Ltd. vs. Commissioner of Income-Tax: Initially challenged the necessity of separate notifications for protocol provisions.
Apollo Tyres Ltd. vs. Commissioner of Income Tax: Karnataka High Court upheld the need for Section 90 notifications for treaty benefits.
EPCOS Electronic Components S.A. vs. Union of India: Further reinforced the requirement of Section 90 notifications.
Gramophone Co. of India Ltd. vs. Birendra Bahadur Pandey and Union of India vs. Azadi Bachao Andolan: Supreme Court decisions elucidating the dualist approach and the importance of Section 90 in treaty implementation.

Legal Reasoning

The Court's reasoning is anchored in India's dualist legal philosophy, wherein international treaties require domestic legislation to be enforceable. Section 90 of the Income Tax Act is pivotal in this context, mandating that the Central Government issue notifications to give effect to DTAAs. The Supreme Court emphasized that without such notifications, treaty provisions, including MFN clauses, remain unenforceable in Indian courts.

A critical aspect of the judgment was the interpretation of the term "is" in the MFN clauses. The Court determined that "is" denotes a present state, implying that the third country must be an OECD member at the time a taxpayer invokes the MFN benefits, not retroactively based on the country's subsequent OECD membership.

Additionally, the Court scrutinized the treaty practices of countries like the Netherlands, France, and Switzerland, highlighting that these nations require explicit domestic processes to implement treaty benefits. This contrasted with the Delhi High Court's stance, which assumed automatic applicability without notification.

Impact

This judgment has profound implications for multinational corporations and tax authorities in India:

For Multinational Corporations: Entities cannot assume automatic applicability of MFN benefits under India's DTAAs. They must ensure that relevant Section 90 notifications are in place to claim reduced withholding tax rates.
For Tax Authorities: There will be heightened scrutiny on the existence and validity of Section 90 notifications before granting treaty benefits.
For Future DTAAs: India will meticulously require Section 90 notifications for any treaty or protocol amendments to be enforceable, ensuring alignment with domestic legal requirements.

Moreover, the judgment delineates a clear procedural pathway for both the government and taxpayers, emphasizing the role of formal notifications in the effective implementation of international tax treaties.

Complex Concepts Simplified

Dualist vs. Monist Legal Systems

In a Dualist System, international treaties and agreements do not automatically become part of domestic law upon ratification. They require specific domestic legislation or notifications to be enforceable. India operates under this system, meaning that DTAAs need to be explicitly notified under applicable statutes like Section 90.

Conversely, a Monist System allows international treaties to become part of domestic law automatically upon ratification, without necessitating additional legislative actions.

Most Favored Nation (MFN) Clause

The MFN Clause within a DTAA ensures that the benefits extended to one treaty partner (usually an OECD member) are reciprocally available to other treaty partners. It aims to maintain equitable taxation standards among countries and prevent discrimination.

Section 90 Notifications

Section 90 of the Income Tax Act, 1961 empowers the Central Government to enter into DTAAs with foreign countries. For any treaty or its protocols to be enforceable in India, a formal notification under this section is mandatory. This notification process integrates the treaty provisions into India's domestic legal framework, making them actionable by tax authorities and courts.

Conclusion

The Supreme Court's ruling in Assessing Officer Circle (International Taxation) establishes a stringent requirement for the enforcement of DTAAs in India. By affirming the necessity of Section 90 notifications for MFN clauses to be operational, the Court reinforces India's commitment to its dualist legal structure. This decision mandates that without explicit legislative action, international treaty benefits cannot be assumed, thereby ensuring clarity, compliance, and consistency in India's tax administration. Multinational entities must now navigate this procedural landscape diligently to avail themselves of treaty benefits, while tax authorities are empowered to uphold the integrity of India's tax treaties through rigorous adherence to notification protocols.